Documents & Reports

PPIAF's global knowledge portfolio (English)

Abstract

Regulatory risk is a key concern for most private sector investors in developing countries. While products such as insurance are available to mitigate political risk, these products do not always cover the potential loss of revenue from a failure to implement... See More +Regulatory risk is a key concern for most private sector investors in developing countries. While products such as insurance are available to mitigate political risk, these products do not always cover the potential loss of revenue from a failure to implement the regulatory framework or arbitrary changes to this framework. In 2005 the Private Infrastructure Development Group requested Public-Private Infrastructure Advisory Facility (PPIAF) assistance to analyze the extent to which regulatory risk was impeding infrastructure investment in developing countries and to assess various approaches and mechanisms to mitigate this issue. The report concluded that it is critical for investors and lenders to focus on projects with strong fundamentals, as robust projects are less likely to require changes (e.g., tariff reform) that increase the potential exposure to regulatory risk. It also noted that regulatory risk is covered by many existing products, such as the World Bank Groups partial risk guarantee for low-income countries, but that investors were not always aware of these products. The report recommended mainstreaming these products and increasing their flexibility to allow them to be applied in a variety of investment environments. Finally, the report highlighted the importance of regulation by contract in countries with weak regulatory regimes and the need to settle disputes in neutral environments, preferably through international arbitration.
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